The Pension Protection Fund Approach to CVAs

The Pension Protection Fund approach to CVAs

Given the on-going debate around the use of CVAs ReSolve is especially pleased to be able to present ‘The Pension Protection Fund Approach to Company Voluntary Arrangements’ which has been written for us by Malcolm Weir, Director of Restructuring and Insolvency at the Pension Protection Fund:

The first decade of the 21st century saw a rapid rise in the use of pre-packaged administrations (pre-packs) to deal with restructuring issues. They presented a risk of ‘pensions dumping’ which we, the Pension Protection Fund (PPF), working in close cooperation with the Pensions Regulator (TPR), continue to seek to avoid. The PPF’s guidance, together with the Graham reforms, in the main, addressed the issue.

Times move on and the current restructuring method of choice is the Company Voluntary Arrangement (CVA). In the same way that pre-packs posed a threat to schemes if misused, there is scope for CVAs to do the same, even those where the published intention is to leave the pension scheme untouched.

An employer lodging CVA proposals, accompanied by the nominees report, in most cases, automatically commences a PPF assessment period.

This is different to other insolvency processes where the assessment period commences on the actual appointment of the insolvency practitioner. One of the effects of the assessment period is that the pension scheme’s creditor rights are exercised by the PPF to the exclusion of the scheme trustees. It is therefore important that the employers and their advisors engage as early as possible with us. The pension claim is valued at the full pension scheme buyout deficit (section 75) and as such, the pension scheme is often the largest single creditor giving us the voting power to block a CVA from succeeding.

The PPF looks at CVA proposals under two headings: those where the scheme is compromised going forward either as one of a body of creditors or where it is the only creditor being affected; and those where the scheme is envisaged to continue unaffected following the approval of the proposals.

Where the scheme is compromised, we apply our published Restructuring Principles which are available on our website. The gateway criteria is that insolvency must be inevitable and the process is not being used simply to avoid substantial creditors. Once this criteria has been satisfied, we will want to ensure the CVA’s financial return to the scheme is significantly better than it would be in an administration or liquidation. This is assessed in light of the size of pension scheme debt which is being avoided by the proposal. We will also expect the scheme to receive anti-embarrassment equity to allow it to participate in any future upside in the company.

The current vogue of ‘landlord only’ CVAs is an example of where the pension scheme is purported to be unaffected.

In the past, our approach was to remain neutral and in most cases abstain from voting thus allowing landlords to decide the future one way or another. However, the history of these CVAs has been poor with notable failures affecting the PPF including BHS and Austin Reed. As a result we have developed our approach to CVAs.

The poor track record, combined with the fact that an employer has admitted it is insolvent through the CVA process must, in the short term at least, mean that the covenant it offers to the pension scheme is weakened. Accordingly the deficit recovery contributions and the length of pension scheme recovery plan are probably in need of revision and it may be that trustees should call for a new valuation to assess this point. There is a real danger that if the CVA does ultimately fail, the scheme will be in a worse position than if the proposal had been rejected at the outset.

As a result of these heightened concerns, we have recently published new guidance to assist employers and their advisors when putting together a CVA proposal to ensure that the issues are fully addressed.

The failure of many CVAs has been due to the substantive underlying problems that face the employer not being addressed, with a “sticking plaster” being applied that only reduces rents. We want to be sure that the employer’s fundamental issues have been identified and effective solutions have been developed if we are being asked to vote in favour of CVA proposals. A comprehensive restructuring plan must be supported by a management team that has both the experience and capability to deliver it, and where necessary, the team should be augmented by a turnaround professional. Notwithstanding the above, plans still fail through lack of core and working capital financial support. We will want to be sure that sufficient funding is available to cover the requirements set out in the plan and provide a sufficient buffer against unexpected events.

In addition, we will want to see that the risks during the implementation of the proposal, both to the scheme and the PPF – which may well be different – are properly addressed. This may include addressing the need to ‘de-risk’ the pension scheme investment portfolio and provide additional contributions to cover PPF drift (essentially the increases in liabilities the PPF assumes through pension scheme members reaching normal retirement age and through pension increases).

Our new guidance provides detail on the areas that will be considered and employers making a proposal should engage with the pension trustees and the PPF as early as possible to ensure that there is sufficient time to consider them.

We will require the trustees’ financial advisors to review and report on the proposals in light of the guidance so sufficient time and access to management should be factored in to accommodate this.

We work closely with TPR on all CVA proposals, and consider if the scheme and the PPF are sufficiently protected and whether there is any scope for Moral Hazard action. In addition, we will not wish to create any precedents in agreeing to a proposal. It is hoped that the refreshed and new elements of the CVA guidance will assist those drafting a CVA proposal to meet the requirements that will allow us to vote in favour.

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